In previous energy downturns, prices slumped but companies kept faith in their oil and gas investments. This time it might be different, as the prospect sinks in that the pandemic’s impact will endure.
Executives are shifting from crisis response to the longer-term outlook. Royal Dutch Shell warned this week it would slash up to $22bn from the value of its assets, a move that followed BP’s announcement that it could take a $17.5bn hit.
As the coronavirus cash crunch focuses minds, businesses — at least in Europe — also believe the crisis will only accelerate the energy transition towards cleaner fuels.
“These companies have decided that some of the assets they have today are worth a lot less than they thought a year ago. In fact, not only are some of them worth a lot less, they are worth nothing,” said Luke Parker at consultancy WoodMackenzie.
Rather than a mere accounting technicality, he says the adjustments to medium and longer-term prices are a sign of upheaval in the sector that deals another blow to the investment case for hydrocarbon producers.
“Demand might still grow from here, and many companies are still chasing a share of that growth,” said Mr Parker. “But make no mistake, the likes of Shell and BP are already ushering in the twilight years.”
Executives who for years rejected the prospect of “stranded assets” are acknowledging publicly the risk that swaths of their oil, gas and refining assets will be rendered uneconomic, with vast hydrocarbon reserves never being extracted and burnt.
Environmentalists and activist investors have pounced on this as the first real recognition from big energy players that their businesses — despite still relatively robust demand for their products — are on a downward spiral.
The FT estimated earlier this year that unviable assets could amount to $900bn should governments aggressively seek to restrict the rise in global temperatures to 1.5C above pre-industrial levels. Some observers say the pandemic is ushering in a new era and the sum could be far higher.
Even before prices started to collapse, energy companies were cutting outlooks and planning asset writedowns late last year — from US oil major Chevron’s $10bn in impairments to €4.8bn in charges from Spain’s Repsol.
Some sceptics say the latest round of impairments, which do not affect companies’ cash positions, are just a part of corporate accounting and a matter of convenience as they face an unprecedented financial crisis.
“The energy transition has a role in the impairments because a company ultimately has to take a view on longer-term oil prices,” said Stuart Joyner, an analyst at Redburn. “But these latest writedowns are predominantly prudent accounting moves taken by the energy sector to reflect a lower price outlook for other reasons, notably the fallout from Covid.”
Many observers believe European oil…
Read More: Oil majors face up to plunging asset values